Three key planned-giving vehicles, demystified

Fred Stang, director of development at the Triangle Community Foundation in Durham, N.C., profiles three essential gift vehicles for nonprofits starting a planned-giving program.

Question:

What are three must-have vehicles in a planned giving program?

Answer:

One very important thing to keep in mind with all gift types: Nonprofit professionals should always encourage donors to talk to their own financial advisers to determine whether a particular gift type is a good idea for them in the context of their particular finances.

Bequests, bequests, bequests

Like they say in real estate: “location, location, location.” For most nonprofits it’s: “bequest, bequest, bequest.” Most of your gifts are going to come from bequests.

Bequests cover any assets bequeathed in a will or trust. If you do nothing else to encourage planned giving, you should learn how to get comfortable asking a donor to put your organization in their will.

Really the most important thing about bequests or any planned-giving request is getting in front of a donor. The vehicle in some ways is secondary because the donor will need to figure that out with his financial or legaladviser.

One common strategy is asking the donor to “endow” her current giving. If you have a donor who usually makes a $1,000 annual gift, why not ask her to consider leaving $20,000 as a bequest?

Bequests can be a specific amount, a percentage or the residual from an estate — what is left over after heirs and other obligations have been satisfied.

The reality is that there are a lot of philanthropists whose children are doing very well, so their ability to give philanthropically from their estates is greater.

Beneficiary designations

The next tier of planned gift would be beneficiary designations — gifts that occur outside of and independently from the will.

What guides where money from an individual retirement account or insurance policies goes is based on beneficiary designations attached to those policies or that account.

A lot of people have been fortunate enough to create significant retirement funds.

You might have a situation where a donor’s children are being well taken care of through other parts of their estates, or an instance where it would not make sense to pass the retirement on to the kids due to potentially high taxes.

So they roll over that retirement account to a charity instead. Sometimes that’s just as easy as having a charity named as beneficiary. Again, the donor should be encouraged to consult with her professional advisor.

On insurance products, either you have a donor who has a life-insurance policy that he doesn’t need anymore, which can be gifted and cashed out to a charity, or the donor can continue to pay the premium.

The nonprofit becomes the owner and the beneficiary of the policy in both of those cases.

In the second instance, the donor agrees to continue to pay premiums on the donated policies. By contributing the necessary funds to the organization, he gets tax deductions on the contribution, and the nonprofit can then pay the premiums.

This works well for an individual, especially one who is still insurable, who really loves a nonprofit and is able to leave a larger gift through insurance policies than he would be able to through his estate.

Those two options, bequests and beneficiary designations, are perfect for a nonprofit that doesn’t want to create any new infrastructure in order to receive gifts.

Getting riskier: gift annuities

For groups that are willing to build on existing infrastructure, a slightly more advanced option would be gift annuities.

A gift annuity is essentially a contract between a nonprofit and a donor where the donor contributes a certain amount of money, and the nonprofit agrees to pay out a certain amount to the donor on at least an annual basis.

If everything runs smoothly, the donor gets a tax deduction and a flow of income for life, and the nonprofit receives the remaining value when the donor passes away.

Gift-annuity programs can be operated by the nonprofit, or it can contract with a financial institution or service provider to run the program.

Contributions into a gift-annuity program are pooled for investment purposes, so a nonprofit must become knowledgeable about investing, and it must be willing to provide all of the necessary tax reports to the donors.

Gift-annuity programs, especially as they are growing, can be risky for the nonprofit.

Even if investment performance declines, gift-annuity programs are still required to provide the payout to the donor, and that can eat into the investment pool’s ability to rebound.

Nonprofits should think through the gift-annuity option carefully before starting one. It is worth exploring whether a local community foundation’s gift-annuity program can be used to meet your donor’s goals.

In any planned giving program, no matter what gift vehicles you choose to employ, it is critical that nonprofits also keep in mind proper recognition, like a gift society, and make sure to keep good records of all donors and donations made.

Fred Stang is director of development at the Triangle Community Foundation in Durham. He is a former president of the Durham/Orange Estate Planning Council and a past board member of the North Carolina Planned Giving Council.